How do private markets fit into London CIV’s investment portfolio?
Our committed assets in private markets stand at about £3.5bn. That is within an asset pool of £33bn across London CIV and means that private markets are about 10% of our total assets. They are clearly a key growth area of focus for our partner funds.
What have London CIV’s partner funds asked for on the private markets front?
Currently, there is a tilt towards income generation over more growth-orientated opportunities. That has been across real estate, private credit, infrastructure and natural capital.
Each partner fund has different holdings across different asset classes and has different views on asset allocation. But the commonality amongst most of our client base is a focus on deployment, liquidity, diversification, investing with impact as well as achieving value for money.
Which private markets do your partner funds want exposure to and why?
There is certainly a range of attractive segments across private markets that we are well positioned in.
I’ll start with infrastructure, which has tailwinds coming from digitalisation and decarbonisation. It is also being fuelled by artificial intelligence adoption, which makes renewable energy investing more compelling.
There will be a rise in infrastructure secondaries. That is obviously a way for investors to recycle capital and to obtain liquidity where it’s required.
In a lower interest-rate environment, we can expect multiples to go up with improvements in valuation, creating a more attractive deal environment. And a more positive macro outlook is clearly positive for assets which benefit from GDP growth.
Fundamentally, infrastructure has that inflation linkage, which is attractive in a high-inflation environment. The uplifts in valuation and the more positive macro backdrop are certainly supportive of this.
Moving on to real estate, we are seeing demand definitely picking up. There continues to be a shortage of properties, which support rent and revenue growth. We are seeing a stabilisation in valuations as well as opportunities, whether that is across logistics, the residential sector or affordable housing.
This aligns with structural trends: whether that is ageing demographics or the need for more energy-efficient buildings. There are certainly some regional differences.
Leasing activity in London has certainly picked up more than in other European cities. There is continued demand for high-quality office space with good amenities, good infrastructure, good transport links and good ESG credentials. The real estate sector will also benefit from lower financing costs.
Logistics is an area that could be attractive. With the trend more towards re-shoring, we are seeing strong rental growth in logistics. Within these sectors, there is a strong linkage to inflation. There is also resilient cashflows and typically less exposure to market volatility.
And, with a sizeable investment in private markets, we have a fiduciary duty to shape the ESG practices of our underlying managers. Getting managers to improve their provision of ESG metrics and reporting also helps to evolve best practice.
Presumably, it was in line with your ESG approach that London CIV was quick to launch a renewable infrastructure fund.
We launched our dedicated multi-manager Renewable Infrastructure fund in March 2021, as we forecasted that we would reach the sector limit within our core infrastructure fund of 30%. So we maxed-out our renewable infrastructure allocation, and at that point, given the expected growth, we saw an attractive opportunity set within renewables.
A number of our partner funds had asked us to launch a separate renewables fund that can invest across renewable energy generation, transmission and distribution, but also opportunistically invest in other enabling technologies in the energy transition, whether that’s battery storage, electric vehicle charging or green hydrogen development.
Has it proved popular?
It has. It is our largest private markets fund constituting more than half of our overall commitments in private markets, with 56% of that portfolio invested in renewables. The number of investors in our Renewable Infrastructure fund stands at 16.
Is the backlash against ESG a worry? Will it have an impact on private markets?
There has been a backlash, but it hasn’t impacted us directly. The fact is the whole world is decarbonising, with most countries having set some sort of net-zero target. Whether it’s done in six years’ time, 20 years or 30 years, that’s the path. That trajectory is only going one way.
I genuinely don’t think this backlash is going to have any material impact on the growth of, for example, the renewables market.
Why, in your view, are private markets so popular with institutional investors?
First and foremost, private market investments are uncorrelated with public markets. There’s more stable pricing and valuations. And, in a low interest-rate environment, it provides much higher yields.
It allows greater diversification in terms of how you can invest to address any specific investment needs and objectives. You can invest across the risk spectrum of asset classes like infrastructure and private credit.
So there are predictable stable income streams that’s obviously tilted towards income generation, or you can invest in private equity, which enables you to invest in high-growth private companies.
In terms of impact and sustainability, there is definitely that real world direct impact. Private market investing aligns well with institutional investors like pension funds and insurance companies that have long-dated liabilities that private markets investments have.
Will it continue to enjoy such popularity continue?
Absolutely yes. Given all that I have just outlined, private markets offer so much. The fundamental drivers underpinning the overall opportunity will certainly remain.
What are the flaws of investing in private markets?
Liquidity risk certainly is high on the list when investing in private markets, so you have to acknowledge that you will be locked up for extended periods in terms of deployment.
In terms of the cost of investing, your private markets investment funds are more expensive than public-market funds.
And a challenge, not necessarily a flaw, is accessing private markets. Such investments are also complex, requiring a lot of knowledge.
You have been in your role for more than four years. What has been your biggest challenge and greatest achievement?
In terms of greatest achievement, we have been acknowledged for building a successful multi-manager platform. We have built the platform from scratch and it continues to grow.
From where we were four years ago and the relationship we have with our partner funds, there has been a lot of positive engagement. That has certainly built the trust and credibility with the partner funds and with the broader investment community.
What objectives have you set yourself and London CIV?
As we approach a new era for the LGPS, it is difficult to set specific objectives. Our over-arching objective is to be our partner funds’ pool of choice and to continually deliver funds or solutions that meet their long-term investment objectives.
What has been the biggest lesson that you have learnt during your career?
Believe in yourself and believe in your team. Have conviction in your ideas and to see them through. To think through the logic and to be strong in that rationale when you are delivering on those ideas.
It is also important to always take a step back and map out what you need to do and where you want to get to.
Comments